Fed Minutes: (More) Talk About Qualitative Thresholds‏

Along the line of yesterday’s speech by vice chairman of the FOMC Janet Yellen, the FOMC minutes showed that the Fed is moving closer to an Evans style rule. There is still work to be done, but we expect a new framework for communication to be announced early next year.

The new framework will likely consist of thresholds for inflation and unemployment which will guide when the Fed will start to tighten monetary policy. The majority of the FOMC prefer qualitative thresholds but some participants favour quantitative guidance. Further, there is not yet consensus on whether the thresholds should refer to realised or projected values and whether the calendar year guidance will continue or be completely phased out. It is also not clear if the framework will include other threshold values than unemployment and inflation.

Further, both the minutes and Yellen’s speech indicate that the thresholds are unlikely to be formulated as a rule. That is, the FOMC will make its decision about the correct monetary policy stance by judgment and a lift-off in rates “would not be automatic once a threshold is reached.” This “discretionary” addon to the rule, will, in our view, decrease the value of the new framework.

Regarding asset purchases it seems far from a done deal that the Fed will replace the treasury purchases in the current twist program with new purchases once the program expires at the end of this year. According to the minutes, “several participants questioned the effectiveness of the current purchases or whether a continuation of them would be warranted if the recent moderate pace of economic recovery were sustained.

In addition, several participants expressed concerns that sizable asset purchases might eventually have adverse consequences for the functioning of asset markets or that they might complicate the Committee's ability to remove policy accommodation at the appropriate time and normalise the size and composition of the Federal Reserve's balance sheet.” We expect to get the answer at the December meeting.

To Read the Entire Report Please Click on the pdf File Below.